Definition
Highest and best use is real estate jargon for the most valuable legal use of a property. It's not necessarily residential—sometimes a corner lot's highest and best use is commercial mixed-use. Understanding this helps you identify whether you're paying for a home or paying for development potential.
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Highest and best use analysis determines maximum property value through legal and physically possible uses. Appraisers use this analysis to determine market value.
Pro Tip
Before buying land or unique properties, think about highest and best use. If you buy a corner lot for a house but its highest and best use is commercial, you might be leaving significant value on the table or overpaying.
Example
A corner lot's highest and best use being commercial mixed-use rather than single-family residential.